The Rationale for Occupational Pensions

Abstract

Employers and employees have no incentive to include pensions as part of employment contracts unless the pension completes a missing market, or ameliorates an imperfection in existing capital or labour markets. We examine the influence on the choice and design of occupational pensions of capital- and labour-market imperfections. In capital markets, we focus on basis risks, taxation, employer default risks, transactions costs, portfolio restrictions, and liquidity constraints. Aspects of labour markets affecting occupational pensions may be the presence of firm-specific human capital, asymmetric information between firms and potential hires, the presence of moral hazard, and internal labour markets in firms which cause employers to attempt to control the retirement behaviour of workers. The implications of this analysis of occupational pensions for public policy towards pensions are briefly examined.